A REPORT ON INTERNATIONAL BUSINESS OPERATIONS OF ONGC &

OVL

OBJECTIVES

The objectives of our study are multi pronged. In this dynamic world of business where companies are no longer local players but are global entities we plan to show how an Indian company has made the right moves and carved out a niche for itself. We also intend to show what factors fuel a companies growth while what are the roadblocks to success. In short the objectives of our project can be stated down as follows:

(1) To study the various business processes of the Indian MNC and to see how the processes at home are different from processes abroad.(2) To study the expansion of its market territory beyond the boundaries of the country due to its international image.(3) To study what all adjustments the company has to make when it moves abroad.(4) To study the various environmental differences like cultural, legal and political between home and foreign country.(5) To study the various advantages that the company is gaining as a result of its operations abroad.

SCOPE OF STUDY

Our study will basically focus on studying an Indian company which has made a foray into the international markets recently and is emerging as a global MNC. The project would focus on the various strategies that the company is following to gain a competitive advantage in the foreign country and what all problems the company in facing in the foreign country and how these problems can be overcome and to study the company’s multinational central management.

METHODOLOGY OF STUDY

The methodology that we would be following would include:

(1) Collecting information about the company from various resources like company’s website, books, journals, databases and from few company officials, if possible.

(2) Analyzing the data collected using qualitative as well quantitative techniques.

(3) Presenting the various findings of the project.

(4) Making certain recommendations to the company.

RATIONALE BEHIND CHOOSING COMPANY

Oil & Natural Gas Commission is a company, which has not only stood the test of time but has successfully dealt with the pressures of intense competition and globalization. ONGC has increasingly focused towards becoming a true global company. For this particular reason we decided to study ONGC as it will give a clear insight on what exactly are the challenges faced by emerging Indian MNC’s.

INTRODUCTION

During the pre-independence period, the Assam Oil Company in the northeastern and Attock Oil company in northwestern part of the undivided India were the only oil companies producing oil in the country, with minimal exploration input. The major part of Indian sedimentary basins was deemed to be unfit for development of oil and gas resources.After independence, the national Government realized the importance oil and gas for rapid industrial development and its strategic role in defense. Consequently, while framing the Industrial Policy Statement of 1948, the development of petroleum industry in the country was considered to be of utmost necessity.Until 1955, private oil companies mainly carried out exploration of hydrocarbon resources of India. In Assam, the Assam Oil Company was producing oil at Digboi (discovered in 1889) and the Oil India Ltd. (a 50% joint venture between Government of India and Burmah Oil Company) was engaged in developing two newly discovered large fields Naharkatiya and Moran in Assam.

In 1955, Government of India decided to develop the oil and natural gas resources in the various regions of the country as part of the Public Sector development. With this objective, an Oil and Natural Gas Directorate was set up towards the end of 1955.In August, 1956, the Directorate was raised to the status of a commission with enhanced powers.Since its inception, ONGC has been instrumental in transforming the country's limited upstream sector into a large viable playing field, with its activities spread throughout India and significantly in overseas territories. In the inland areas, ONGC not only found new resources in Assam but also established new oil province in Cambay basin (Gujarat), while adding new petroliferous areas in the Assam-Arakan Fold Belt and East coast basins (both inland and offshore).

The perceptions about ONGC began to change for the better after it was given a status of Corporation in 1994 under the Companies' Act. Now the sentiment has peaked in its favour to new heights. R. Kanan, general manager, Oil & Petrochemicals, ICICI Ltd, enlists the factors that have contributed to this change. "The dismantling of APM in April this year, ONGC's recent successes in acquisition of stake in Sakhalin I in Russia, gas prospects in Vietnam - where it has 45 per cent stake in the joint venture (JV) and most importantly its launch of Mumbai High redevelopment plan are the positive developments favouring ONGC's prospects in near future," he says.

There are many others who share his optimism. For example, an encouraging trend in ONGC'S crude and gas production in the current year has not escaped analysts' notice. "Production of oil and gas for the first quarter in this year, encouragingly, increased year-on-year by an estimated 8.5 per cent and 6.1 per cent, respectively," reports Equity Master, a website. After going through a decade of uncertainty, this reassessment must come as a great relief to all concerned in ONGC.

ONGC spent the latter half of the '90s in introspection. The government had appointed a Mumbai High Review Committee in 1996 to examine ONGC'S claims to its competence in managing Mumbai High problems. The committee headed by DGH chairman, K Narayanan, submitted its report, which accepted the Corporation's claim of inhouse capabilities. Nonetheless, it recommended that ONGC should take technical assistance from the consultants. ONGC commissioned Gaffne, Cline & Associate - stalwarts with experience of having worked at over 200 different sites spanning the globe - as its consultants to study and recommend enhanced oil recovery plan. As far as Neelam was concerned, the Corporation decided to set up its own multidisciplinary team under Singh.

The Consultant's mandate was to:- Revalidate the existing seismic and other data- Acquire fresh 3D (three dimension) seismic data for further evaluation of Mumbai High field- Prepare maps of oil pools- Drill wells to locate by passed oil- Use seismic data and well logs for making forecast of exploitable reserves- Using these forecasts suggest Mumbai High redevelopment plan

Acknowledging the in-house capabilities of ONGC scientists and engineers, GCA, constituted a multi-disciplinary team made up of ONGC personnel. It limited itself to a role of facilitator. Both the teams submitted their report in 2001 to the ONGC board. This is as far as what it did concerning its malfunctioning assets. But, the Corporation was also suffering from the organisational atrophy. To correct this ONGC appointed McKinsey in 1997.

McKinsey's mandate was to evolve an organisational structure that was far more responsive to its business needs than that based on business groups. "Almost every proposal originating in the field required 15 to 20 signatures. The files shifted too and fro in the earlier system between functional heads at the headquarters," says Raha. It often meant delays exceeding a year in matters requiring urgent decisions on fields. Also, since responsibilities were shared at production platforms between different business groups, the system degenerated into wrangling over responsibilities. Similarly, group loyalties often took precedence over the requirements of tasks. But, most importantly, it was found that the performance evaluation criteria based on business group yardstick were completely at loggerheads with requirements on fields. Mckinsey recommended an asset-based approach with clearly-defined responsibilities in its presentation titled 'Organisation Transformation Project'.

When Raha took charge in May 2001, it was time to act and take things forward. All of the reports were in. Pilots at Neelam and Mumbai High had proved successful. Besides, 'Navratna' status earned in April 1999 had given the management substantial leeway to evolve and put together its own strategies. However, several inconsistencies in Mckinsey recommendations needed ironing-out before the experience acquired from the pilots in Neelam and Western offshore could be moulded into a larger strategic plan.

Though Mckinsey recommendations were broadly accepted, coordination issues concerning commonly-shared services (such as who should drilling personnel working at asset site report to? A functional or an asset head?) needed to be sorted out.

ONGC : CHANGING WITH TIMES

ONGC is India’s Most Valuable Company, having a market capitalisation of Rs. 1 trillion and continues to retain its position as the most valuable company of India.

Was the biggest wealth creator for the period 1998-2003.(Rs. 226.3 billion)

Only Indian company to have earned a net profit of over 10,000 crore.

Added 49.96 MMT of ultimate reserves and kept up the trend of positive accretion for the third consecutive year.

ONGC has a vertically oriented organizational structure. Is Asia’s best Oil & Gas company, as per a recent survey

conducted by US-based magazine ‘Global Finance’. Ranks as the 2nd biggest E&P company (and 1st in terms of

profits), as per the Platts Energy Business Technology (EBT) Survey 2004

Ranks 24th among Global Energy Companies by Market Capitalization in PFC Energy 50 (December 2004). [ONGC was ranked 17th till March 2004, before the shares prices dropped marginally for external reasons.

Is placed at the top of all Indian Corporates listed in Forbes 400 Global Corporates (rank 133rd) and Financial Times Global 500 (rank 326th), by Market Capitalization.

Is recognized as the Most Valuable Indian Corporate, by Market Capitalization, Net Worth and Net Profits, in current listings of Economic Times 500 (4th time in a row), Business Today 500, Business Baron 500 and Business Week.

Has created the highest-ever Market Value-Added (MVA) of Rs. 24,258 Crore and the fourth-highest Economic Value-Added (EVA) of Rs. 596 Crore, as assessed in the 5th Business Today-Stern Stewart study (April 2003), ahead of private sector leaders like Reliance and Infosys. ONGC is the only Public Sector Enterprise to achieve a positive MVA as well as EVA.

Is targeting to have all its installations (offshore and onshore) accredited (certified) by March 2005. This will make ONGC the only company in the world in this regard.

Owns and operates more than 11000 kilometers of pipelines in India, including nearly 3200 kilometers of sub-sea pipelines. No other company in India operates even 50 per cent of this route length.

Crossed the landmark of earning Net Profit exceeding Rs.10,000 Crore, the first to do so among all Indian Corporates, and a remarkable Net Profit to Revenue ratio of 29.8 per cent. The growth in ONGC's profits is not solely due to deregulation in crude prices in India, as deregulation has affected all the oil companies, upstream as well as downstream, but it is only ONGC which has exhibited such a performance (of doubling turnover and profits).

Has paid the highest-ever dividend in the Indian corporate history.

Its 10 per cent equity sale (India's highest-ever equity offer) received unprecedented Global Investor recognition. This was a landmark in Indian equity market, establishing beyond doubt, the respect ONGC's professional management

commands among the global investor community. According to a report published in 'The Asian Wall Street Journal (Hong Kong) , ONGC's Public Issue brought in 20 Foreign Institutional Investors (FIls) to India, as (it was reported), 'they could not ignore the company representing India's energy security'.

The Market Capitalization of the ONGC Group (ONGC & MRPL) constitutes 10 per cent of the total market capitalization on the Bombay Stock Exchange (BSE). ONGC has an equity weightage of 5 per cent in Sensex; 15 per cent in the Nifty (the only Indian corporate with a two-digit presence there); ONGC commands a 7 per cent weightage in the Morgan Stanley Capital International (MSCI) Index.

The growth in ONGC's Market Capitalization (from Rs. 18,500 Crore before May 2001 to Rs. 1,25,000 Crore in January 2004) is unprecedented and except Wipro (who had a higher market capitalization temporarily), no other Indian company (either in public or private sector) has seen such a phenomenal growth.

ONGC has come a long way from the day (a few years back) when India and ONGC did not figure on the global oil and gas map. Today, ONGC Group has 14 properties in 10 foreign countries. Going by the investments (Committed: USD 2.708 billion, and Actual: USD 1.919 billion), ONGC is the biggest Indian Multinational Corporation (MNC).

ONGC ended the sectoral regime in the Indian hydrocarbon industry and benchmarked the globally- established integrated business model; it took up 71.6 per cent equity in the Mangalore Refinery & Petrochemicals Limited (MRPL), and also took up a 23 per cent stake in the 364-km-long Mangalore-Hasan-Bangalore product Pipeline, connecting the refinery to the Karnataka hinterland. By turning around MRPL in 368 days, ONGC has set standards of public sector companies reviving joint (or private) sector companies,

proving that in business, professionalism matters, not ownership.

ONGC has announced the investment outlay of Rs 33,OOO crore for the tenth five-year plan (2007). Rs13, 000 crore of this has been earmarked for acquisition of oil equity abroad. It is putting its legacy systems on a common SAP platform. It has also installed a virtual reality centre, Third Eye, at its Mumbai office. In offshore areas, by infield drilling, it is reducing the well spacings in order to draw out undrained oil between the existing wells. As the parameters on which older wells were designed have changed, these wells are being redesigned and revitalised.

In Tripura, ONGC already has 47 billion cubic metres (bcm) of in place gas reserves. While the field has a capacity to produce 4.5 bcm gas per day it is producing only 1.192 bcm for meeting the demand in the area. For the balance, it has still has to find the solution to evacuating gas through the difficult terrain to other parts of India. In deep waters, ONGC has 21 petroleum exploration licences, of which 12 have come on nomination basis and the rest through NELP bids. In the IX plan it drilled five prospective wells. Two of these have shown encouraging accumulation of hydrocarbons. It has now prioritised four deep-water projects for drilling in Kutch, Kerala-Konkan, Krishna-Godavary and Cauvery basins. It will be drilling in all 47 wells in these basins. Overall, the drilling activity has risen sharply in recent years (see chart). Meanwhile a sizable gas discovery has been made in Daman. Initial estimates suggest reserves in the range of 30 to 50 million cubic feet. This could grow as new exploratory data comes in.

However, the most exciting of recent developments in ONGC is its recent acquisition of MRPL. This is being viewed by its avid observers as a first step that Raha has taken towards making it

an integrated oil company that is in line with the global giants like Exxon Mobil or Shell. ONGC also has retail marketing rights in areas where it operates. But, its progress in this domain also hinges on whether or not it is allowed to bid for HPCL and BPCL. If the government gives it the nod it may change from being simply an exploration and oil production company to a full-fledged oil major in no time.

ONGC VIDESH LIMITED

OVL is a wholly owned subsidiary of ONGC , India’s largest integrated oil and gas company. OVL operates solely in foreign markets.

OVL today is the second largest E&P company in India by reserves, second only to ONGC. It has eight overseas assets and is actively seeking more opportunities across the world.

OVL's efforts have been supported wholeheartedly by the Government of India, which has allowed OVL exclusive empowerment vide Office Order No. DPE ii (32)/96-Fin. dated January 17, 2000, which provides OVL single window clearance for overseas upstream projects irrespective of investments involved.

OVL’s concerns is on the following :1. Focused Approach2. Strong relations3. Leverage “buyer’s powers”4. Total deregulation of overseas business.5. Provision of fiscal & tax benefits.

Vision of the company: “To be a world class E&P company providing security oil to the country.”

Mission of the company : “By 2025, contribute 60 MMTPA of equity oil and gas.”

Currently has 8 foreign assets & is on the lookout for more.

Investments of $1.7 billion in Sakhalin, Russia. A one time investment of $690 million in Sudan, biggest by

any corporate in India Have had profits to the tune of 23 cr, 59cr & 429 cr for the

yrs 2002, 2003, and 2004. Has tie ups some of the biggest names: Petronas, British

petroleum, Exxon etc.

The above diagram shows the various parts of the world where OVL operates. Most are oil exploration blocks but OVL produces oil at their Vietnam and Sudan projects. Their production has been on an increase.

CORPORATE SOCIAL RESPONSIBILITY

Successfully handled safety & environmental issues at all sites.

Proper treatment of affluent before releasing it in the environment.

A minimum of 500 mts from high tide point must be kept clear of all structures so that beaches are open to public.

At Sakhalin a $1 million micro-finance project with Exxon Mobil.

Park Beautification Programmes. Over $200 million for public infrastructure like roads &

bridges both in Russia and Sudan. Have regulations in place to ensure that the laws of the land

are followed.

NEW BUSINESSES

ONGC has also ventured into Coal Bed Methane (CBM) and Underground Coal Gasification (UCG);

CBM production would commence in 2006-07 and UCG in 2008-09

ONGC is also looking at Gas Hydrates, as it is one possible source that could make India self-sufficient in energy.

Started the Sagar Sammriddhi project, a deep water oil extraction project, at par with the best in the world.

The new project has a daily cost of $0.75 million. Aims to dig wells, some as deep as 3 kms.

FACTORS FOR THE SUCCESS OF ONGC & OVL

The success of ONGC & OVL can be explained with the help of the following diagram:

The business of ONGC features high on almost all the parameters.

1. The impetus for international business is high in the company2. The company is totally internally managed i.e., without the

help of outsiders hence is high on this scale as well3. The company has customized itself according to the countries

it operates in and hence can be said to have high operation standards.

4. OVL operates in 12 countries which is a fairly big number hence can be said that is quiet wide spread.

5. The countries vary from Russia to Iran to Myanmar. The religious sentiments differ so do the type of governments. Hence OVL scores highly again on the diversification front.

ONGC’s PIONEERING EFFORTS

ONGC is the only fully–integrated petroleum company in India, operating along the entire hydrocarbon value chain :

Holds largest share (57.2 per cent) of hydrocarbon acreages in India.

Contributes over 84 per cent of Indian’s oil and gas production.

Every sixth LPG cylinder comes from ONGC. About one-tenth of Indian refining capacity. Created a record of sorts by turning Mangalore Refinery and

Petrochemicals Limited around from being a stretcher case for referral to BIFR to among the BSE Top 30, within a year.

Owns 23% of Mangalore-Hasan-Bangalore Product Pipeline (MHBPL), connecting MRPL to the Karnataka hinterland.

COMPTETIVE STRENGTH

All crudes are sweet and most (76%) are light, with sulphur percentage ranging from 0.02-0.10, API gravity ranging from 26°-46° and hence attracts a premium in the market.

Strong intellectual property base, information, knowledge, skills and experience.

Maximum number of Exploration Licenses, including competitive NELP rounds.

ONGC owns and operates more than 11000 kilometers of pipelines in India, including nearly 3200 kilometers of sub-sea pipelines. No other company in India, operates even 50 per cent of this route length.

LEVERAGING TECHNOLOGY

To attain the strategic objective of improving the Recovery Factor from 28 per cent to 40 per cent, ONGC has focused on prudent reservoir management as well as effective implementation of technologies for incremental recovery to maximize production over the entire life cycle of existing field

Improved Oil Recovery (IOR) and Enhanced Oil Recovery (EOR) schemes are being implemented:

In 15 fields including Mumbai offshore At a total investment exceeding US $2.5 billion. Yielding incremental 120 MMT of O+OEG over 20 years

SOURCING EQUITY OIL ABROAD

ONGC's overseas arm ONGC Videsh Limited (OVL), has laid strong foothold in a number of lucrative acreages, some of them against stiff competition from international oil majors.OVL has so far, acquired 15 properties in 14 foreign countries, and striving to reach out further

OVL’s projects are spread out in Vietnam, Russia, Sudan, Iraq,

Iran, Lybia, Syria, Myanmar, Australia, and Ivory Coast. It is further pursuing Oil and gas exploration blocks in Algeria, Australia, Indonesia, Nepal, Iran, Russia, UAE and Venezuela.

Production Sharing Contract in Vietnam for gas field having reserves of 2.04 TCF, with 45 per cent stake in partnership with BP and Petro Vietnam. Gas production has commenced from January 2003.

20 per cent holding in the Sakhalin–1 Production Sharing Agreement. The US $ 1.77 billion investment in Sakhalin offshore field is the single largest foreign investment by India in any overseas venture and the single largest foreign investment in Russia. It is scheduled to go on production during 2005-06

Acquired 25 per cent of equity in the Greater Nile Oil Project in Sudan, the first producing oil property. ONGC Nile Ganga BV, a wholly-owned subsidiary, has been set up in the Netherlands to manage this property. Around 3 Million Tonnes of crude oil is coming to India annually from this project. This is the first time that equity crude of a group of companies in India is being imported into India for refining by the group

Discovered a world-class giant gas field ‘Shwe” in Block A-1(where OVL has 20 per cent share) in Myanmar, with estimated recoverable reserve of 4 to 6 trillion cubic feet of gas.

Besides taking equity in oil & gas blocks and looking for stakes in E&P companies, OVL is also bagging prospective contracts (like the refinery upgradation and pipeline contracts in Sudan, awarded to OVL on nomination basis due to its performance in that country), which will increase ONGC’s equity oil basket. ONGC’s strategic objective of sourcing 20 million tones of equity oil abroad per year is likely to be fulfilled much before 2020. In fact, OVL is now eyeing a long-term target of 60 MMT of Oil equivalent per year by 2025.

Going by the investments (Committed: US $ 4.3 billion, and Actual: US $ 2.75 billion), ONGC is the biggest Indian Multinational Corporation (MNC).

  Best In Class Infrastructure And Facilities ONGC’s success rate is at par with the global norm and is elevating its operations to the best-in-class level, with the modernization of its fleet of drilling rigs and related equipment, at an investment of around US $ 400 million.ONGC has adopted Best-in-class business practices for modernization, expansion and integration of all Info-com systems with investment of around US $ 125 million.

Onshore

Production Installation :- 225Pipeline Network (km) :- 7900Major Offshore Terminals (including CFU, LPG, Gas, Sweetening plants, Storage Tanks) :- 2Drilling Rigs :- 75Work Over rigs :- 66Seismic Units :- 33Logging Units :- 35

Offshore Well Platforms :- 131Well-cum-Process Platforms :- 5Process Platforms :- 28Drilling/ Jack-up-Rigs :- 18Pipeline Networks (km) :- 3200

Offshore Supply Vessels :- 32Special Application Vessels :- 4

OPPORTUNITIES

New oil blocks in the Cuba & other Latin American Companies.

Contribute 60 MMTPA by the year 2025 by using state of the art technology and soliciting tenders in new regions to explore oil and gas.

Foray into retailing by launching OVal, fuel dispensing stations at Mangalore.

Tie up with SHELL Bitumen co. for manufacturing petroleum products in India.

Launched Mangalore SEZ to envisage an investment of 35000 cr.

Under the Mangalore SEZ plan it aims to build a Gasification plant, oil refinery, development of part of the Mangalore port etc.

Foster tie ups with other Indian companies like GAIL, OIL etc. to jointly explore and extract oil & gas in India & abroad.

ISSUES AND THREATS

The US-Iraq war has left the Iraq Block 8 exploration project in the lurch.

The dwindling petroleum reserves.

Faces stiff competition from other regional players like China National Petroleum corp., Korea Gas corp., Daewoo Intnl. Corp. etc

As the world moves towards clean fuels or eco-friendly fuels there is a threat in the long run to the oil business.

OVL has expertise over land based exploration and extraction of oil while majority of the crude oil is deposited in the sedimentary layers deep beneath the sea, hence technological expertise must be improved.

A latest threat has emerged from the proximity of the Russian Energy Ministry, which controls the Yugansk oil fields, with the Chinese National Petroleum Corp. meaning that OVL will suffer in terms of profit sharing.

The dictator style regimen in countries like Myanmar, Sudan & Libya and strict government regulations in Iran can hamper the interest of the company in the long run. Hence it is important that the government of India maintains cordial relationship with these governments.

RECOMMENDATIONS

Aggressively lookout for new oil blocks so that Reserve Replacement to Production Ratio stays high.

Affect an overall organisational restructuring i.e., vertical to horizontal to facilitate faster communication

Pick up stakes in regional oil blocks like the Yugansk oil fields in Russia.

Keep upgrading technology to have an edge over regional players.

Increase recovery from a low 28% to 40-50%. Increase presence in the fuel retailing business by

opening more pumps all over India Form joint ventures with local companies to explore

oil in India.

KEY LEARNINGS

1. Think global act local. ONGC has embodied this as their mantra over the years. They have ventured far

and wide but have always made sure that wherever they go they keep in mind the culture , ethics and the laws of the land.

2. That to keep ahead of your competitors you must continuously innovate and follow up by keeping abreast with the latest technology.

3. That even Indian companies can beat global standards. ONGC & OVL have proved this by being the first Indian company to figure in double digits in Fortune 500 list.

4. That Corporate Social Responsibility is an important tool to be used by companies in the race against competitors where small things and gestures matter.

5. If a company cannot adapt and adjust to the local environment by being one of them the company might not last long and will perish eventually.